Sun Gro Horticulture Income Fund Releases 2009 Fourth Quarter and Year-End
Results

Fund delivers markedly improved annual operating performance, ends 2009 with significantly stronger balance sheet

Fund announces details of proposed conversion to a corporate structure - see separate news release of same date

TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2009 fourth quarter and year-end financial results on Thursday, March 18 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-888-231-8191 or 647-427-7450 (Greater Toronto Area and International).

A replay will be available through March 31, 2010 at: 1-800-642-1687 or 416-849-0833. Passcode 55985196.

To access the live and archived webcast, please go to: http://www.investorcalendar.com/IC/CEPage.asp?ID=155857 or to the Fund's website at: www.sungro.com.

VANCOUVER, March 17 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and 12 months ended December 31, 2009. The three-month period represents the fourth quarter of the Fund's 2009 fiscal year. Annual revenues were up by 3%, as a stronger US dollar offset a 10% decline in sales volumes, which the company measures in equivalent bales, or EBs (referring to 10 cubic feet of product). Increased revenues, combined with the ongoing benefits of Sun Gro's 2008 productivity initiatives and lower transportation costs, drove a tripling of operating income and a 39% improvement in EBITDA. The higher EBITDA, along with reduced use of working capital, supported an aggressive term debt reduction program and allowed the Fund to further reduce leverage by making substantial restricted cash deposits. Net earnings for the year were also significantly higher.

The year-over-year drop in sales volumes, as measured in EBs, was a result of the continued economic downturn in Sun Gro's principle US markets. The positive impact of a weaker Canadian dollar on its primarily US dollar denominated revenues was concentrated in the first nine months of the year, as this favourable exchange rate trend reversed in the final quarter of 2009. Results were also favorably impacted by lower energy costs.

"We are pleased with our overall performance in 2009," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "In particular, we are proud of the excellent progress we have made in reducing our debt, which allowed us to improve our senior leverage ratio at year-end to 3.2 from 5.5 at the end of 2008. As a result, we were able to enter the new year with a much stronger balance sheet and lower interest rates on our outstanding debt."

Fourth Quarter Financial Results

Fourth quarter revenues of $49.9 million were down by 7% from the $53.7 million reported in 2008. The decrease was mainly due to the effect of the stronger Canadian dollar on Sun Gro's US dollar sales, as well as a 5% reduction in sales volumes. During the fourth quarter, the average value of the Canadian dollar in relation to the US dollar was up by 16% from 2008.

Fourth quarter EBITDA of $4.5 million was slightly higher than the 2008 level and was the highest fourth quarter amount posted by Sun Gro since 2006.

While overall sales volumes were down from the 2008 level, Sun Gro saw a 7% improvement in sales volumes of its higher-value peat and bark-based growing mixes. However, volumes of straight peat moss decreased by 9%, due to lower demand, and volumes of bulk bark mixes were down by 23%, as a result of reduced sales to growers of foundation and ornamental plants. Demand for these nursery products is largely driven by new home construction, which was severely depressed throughout 2009. Similarly, volumes of sand-based mix declined by 23% to 101,000 EBs, about half the quarterly rate they had been running in 2009. The higher sales of sand-based mixes in the first nine months of the year were driven by US government stimulus funded projects in the Southeastern US that had been completed or were slowing by the fourth quarter.

Gross margin was significantly affected by the less favourable exchange rates, declining to 38% from 46% in 2008. The negative impact of foreign exchange in the final quarter of 2009 was partially offset by lower distribution expenses and realized gains on foreign currency contracts. In the fourth quarter of 2008, the Canadian dollar weakened sharply, resulting in higher operating income and realized losses on foreign currency contracts.

Annual Financial Results

Sun Gro's annual revenues of $229.4 million were $7.5 million higher than the $221.9 million reported in 2008, despite the 10% decline in overall sales volumes. The revenue increase was primarily due to the relative weakness of the Canadian dollar during the first nine months of 2009, as well as stable customer pricing. For the full year, the average value of the Canadian dollar in relation to the US dollar was down by 7% from 2008.

Year-over-year, sales volumes were lower in all product categories except sand-based mixes. Volumes of peat and bark-based growing mixes declined by 2%, due to reduced sales of private label retail mixes. The reduction in retail mix volumes was partially offset by volume growth in Sun Gro's higher-value core professional mix business, particularly later in the year. As expected, volumes of straight peat moss decreased by 22%, due mainly to the company's decision not to renew a large peat supply contract, as well as lower sales to the golf course industry. Volumes of bulk bark mixes declined by 12% year-over-year, due to the reduced sales of nursery products. In the sand-based mix category, volumes increased by 15%.

Gross margin for the 12 months increased to 43% from 42% in 2008. The improvement was due to the combined impact of the productivity initiatives Sun Gro implemented in 2008 and the stronger US dollar during the first three quarters of the year. Operating income increased to $18.3 million from the $6.0 million reported in 2008. EBITDA increased to $26.4 million from $19.1 million in 2008. The EBITDA improvement was achieved despite the $4.3 million of realized foreign currency contract losses that were recorded in 2009, compared to a gain of $1.1 million in 2008. Net earnings swung from a loss of $42.1 million in 2008 to a profit of $18.9 million in 2009.

Reconciliation of net earnings (loss) to earnings before interest, taxes, depreciation and amortization (EBITDA)

    
                                                        Three       Three
                                                        months      months
                              Year ended  Year ended    ended       ended
                               December    December    December    December
    (in thousands of dollars)  31, 2009    31, 2008    31, 2009    31, 2008
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period               $   18,921  $  (42,061) $    2,910  $  (17,047)

    Adjustments:
      Interest expense             9,251       7,440       2,075       2,178

      Depreciation, depletion
       and accretion              10,965      10,904       2,093       2,342
      Amortization of
       intangibles                 2,422       2,450         589         607
      Goodwill and asset
       impairments                 2,855      24,945           -           -
      Unrealized (gain) loss
       on foreign currency
       contracts                 (14,511)     13,999      (2,025)      9,865
      Unrealized foreign
       exchange (gain) loss on
       US dollar assets and
       liabilities                (7,090)     10,429      (2,179)      9,455
      Loss (gain) on disposal
       of property, plant and
       equipment                  (1,135)        212           -          72
      Income tax provision
       (recovery), net             4,747      (9,216)      1,073      (2,968)
    -------------------------------------------------------------------------
    EBITDA                    $   26,425  $   19,102  $    4,536  $    4,504
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Balance Sheet Strengthened

During 2009, Sun Gro reduced its debt obligations by a total of $13.4 million, repaying principal of $8.4 million on term and other debt, and depositing US$4.6 million to a restricted cash account. In addition, drawings on the Fund's revolving operating facility (net of cash on hand and bank overdrafts) at the end of 2009 were reduced to $24.7 million from $29.6 million at the 2008 year-end. The $4.9 million reduction was due to more efficient working capital management and improved earnings. At December 31, 2009, the Fund was in compliance with all of its debt covenants.

In December 2009, the Fund completed the planned amendment of its credit facilities. In addition to extending the maturity of the Fund's revolving operating facility to 2011, the amendment decreased its borrowing limits to better match the Fund's reduced requirements. Subsequent to year-end, the Fund added Bank of America to its syndicate of lenders, joining existing lenders Bank of Montreal and Prudential Capital Group. "We are pleased to add the broad US presence of Bank of America to our lending group and we look forward to many years of working together," said Weaver.

"In 2009, we utilized our cash flows to significantly reduce our debt, and we are targeting a similar scale of debt reduction in 2010," stated Weaver. "We expect to remain in compliance with existing covenants for the balance of 2010 as we continue to work to reduce our debt further."

Distributable Cash

After the $13.4 million of debt repayments and restricted cash deposits, the Fund generated distributable cash of $0.5 million, or $0.02 per unit, in the 12 months ended December 31, 2009. Under the terms of its credit facility, the Fund is currently prohibited from making distributions to unitholders. All available funds are being used to strengthen the Fund's balance sheet, which was leveraged to acquire key peat resources and build out Sun Gro's US plant network in recent years.

By comparison, in 2008, the Fund generated distributable cash of $8.4 million, or $0.38 per unit, and declared distributions of $9.2 million, or $0.41 per unit. However, debt repayments were only $0.5 million in 2008.

Statement of Distributable Cash

    
                                                        Three       Three
                                                        months      months
                              Year ended  Year ended    ended       ended
    (in thousands of dollars   December    December    December    December
     except per-unit amounts)  31, 2009    31, 2008    31, 2009    31, 2008
                              -----------------------------------------------
    Cash flows from operating
     activities               $   20,160  $   10,717  $    2,294  $    1,427

    Adjustments:
      Change in non-cash
       operating working
       capital                    (4,497)      1,056        (481)      1,773
      Sustaining capital
       expenditures               (2,985)     (2,901)     (1,367)       (491)
      Payments on capital
       leases and other loans       (486)       (493)        (98)       (101)
      Restricted cash payments    (4,978)          -      (1,183)          -
      Repayment of term loans     (6,674)          -      (1,215)          -
                              -----------------------------------------------

    Distributable cash        $      540  $    8,379  $   (2,050) $    2,608
                              -----------------------------------------------
                              -----------------------------------------------
    Distributable cash
     per unit                 $     0.02  $     0.38  $    (0.09) $     0.12
                              -----------------------------------------------
                              -----------------------------------------------
    Distributions declared
     per unit                 $        -  $   0.4125  $        -  $        -
                              -----------------------------------------------
                              -----------------------------------------------
    

Operating Results for the three months ended December 31, 2009 and 2008

    
    Comparative Statements of Earnings
     (Loss) and Comprehensive Income
     (Loss)                                Three months       Three months
     (In thousands of dollars except          ended              ended
     per-unit amounts and number of        December 31,       December 31,
     units outstanding                         2009               2008
                                        ------------------ ------------------
    Revenue                              $   49,884  100%   $   53,654  100%
    Cost of goods sold                       30,992   62%       28,764   54%
                                        ------------       ------------
    Gross profit                             18,892   38%       24,890   46%

    Distribution expenses                     8,597   17%       10,744   20%
    Selling expenses                          4,155    8%        3,977    8%
    General and administrative expenses       4,449    9%        6,599   12%
                                        ------------       ------------
    Total operating expenses                 17,201   34%       21,320   40%
                                        ------------       ------------
    Operating income                          1,691    4%        3,570    6%

    Other income (expense), net               4,367    8%      (21,407) -40%
    Interest expense                         (2,075)  -4%       (2,178)  -4%
                                        ------------       ------------
    Earnings (loss) before income taxes       3,983    8%      (20,015) -38%
    Income tax (provision) recovery
      Current                                  (648)  -1%          874    2%
      Future                                   (425)  -1%        2,094    4%
                                        ------------       ------------
    Income tax (provision) recovery, net     (1,073)  -2%        2,968    6%
                                        ------------       ------------
    Net earnings (loss) for the period   $    2,910    6%   $  (17,047) -32%
    Other comprehensive income (loss):
      Unrealized gain (loss) on
       translating financial statements
       of self-sustaining foreign
       operations                            (1,943)  -4%        8,190   15%
                                        ------------       ------------
    Comprehensive income (loss) for the
     period                              $      967    2%   $   (8,857) -17%
                                        ------------       ------------
                                        ------------       ------------
    Basic and diluted earnings (loss)
     per unit                            $     0.13         $    (0.76)
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,284,681         22,284,681
                                        ------------       ------------
                                        ------------       ------------



    Selected supplemental
     revenue information         2009        2008       Increase (decrease)

    Volume in thousands of
     EBs(1)
    Peat and Bark-based
     Growing Mixes                 1,515       1,417          98          7%
    Peat Moss                        744         818         (74)        -9%
    Bulk Bark Mixes                  518         675        (157)       -23%
    Fertilizer and Minerals           66          62           4          6%
    Sand-based Mixes                 101         131         (30)       -23%
                              ----------- ----------- ----------- -----------
    Total                          2,944       3,103        (159)        -5%
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------
    Average revenue per
     EB(1) (US $)
    Peat and Bark-based
     Growing Mixes            $    20.61  $    20.71  $    (0.10)         0%
    Peat Moss                      10.77       11.26       (0.49)        -4%
    Bulk Bark Mixes                 8.57        8.02        0.55          7%
    Fertilizer and Minerals        38.09       40.63       (2.54)        -6%
    Sand-based Mixes               10.09       10.83       (0.74)        -7%
                              ----------- ----------- ----------- -----------
    Total                     $    16.04  $    15.44  $     0.60          4%
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------
    Average revenue per
     EB(1) (CDN $)
    Peat and Bark-based
     Growing Mixes            $    22.23  $    23.31  $    (1.08)        -5%
    Peat Moss                      11.60       12.77       (1.17)        -9%
    Bulk Bark Mixes                 9.24        9.07        0.17          2%
    Fertilizer and Minerals        40.95       46.60       (5.65)       -12%
    Sand-based Mixes               10.91       12.51       (1.60)       -13%
                              ----------- ----------- ----------- -----------
    Total                     $    17.29  $    15.58  $     1.71         11%
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    (1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
        referring to 10 cubic feet of product. Calculation of average revenue
        per EB does not include transportation-related surcharges or the cost
        of early payment discounts.

    Operating Results for the 12 months ended December 31, 2009 and 2008

    Comparative Statements of Earnings
     (Loss) and Comprehensive Income
     (Loss)                                 Year ended         Year ended
     (In thousands of dollars except          ended              ended
     per-unit amounts and number of        December 31,       December 31,
     units outstanding                         2009               2008
                                        ------------------ ------------------
    Revenue                              $  229,352  100%   $  221,935  100%
    Cost of goods sold                      131,654   57%      129,084   58%
                                        ------------       ------------
    Gross profit                             97,698   43%       92,851   42%

    Distribution expenses                    38,508   17%       49,064   22%
    Selling expenses                         18,655    8%       16,353    8%
    General and administrative expenses      22,195   10%       21,443    9%
                                        ------------       ------------
    Total operating expenses                 79,358   35%       86,860   39%
                                        ------------       ------------
    Operating income                         18,340    8%        5,991    3%

    Other income (expense), net              17,434    7%      (24,883) -11%
    Asset impairment                         (2,855)  -1%      (24,945) -11%
    Interest expense                         (9,251)  -4%       (7,440)  -4%
                                        ------------       ------------
    Earnings (loss) before income taxes      23,668   10%      (51,277) -23%
    Income tax (provision) recovery
      Current                                (1,511)  -1%          111    0%
      Future                                 (3,236)  -1%        9,105    4%
                                        ------------       ------------
    Income tax (provision) recovery, net     (4,747)  -2%        9,216    4%
                                        ------------       ------------
    Net earnings (loss) for the period   $   18,921    8%   $  (42,061) -19%
    Other comprehensive income (loss):
      Unrealized gain (loss) on
       translating financial statements
       of self-sustaining foreign
       operations                            (7,453)  -3%       10,468    5%
                                        ------------       ------------
    Comprehensive income (loss) for
     the period                          $   11,468    5%   $  (31,593) -14%
                                        ------------       ------------
                                        ------------       ------------
    Basic and diluted earnings (loss)
     per unit                            $     0.85         $    (1.89)
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,284,681         22,284,681
                                        ------------       ------------
                                        ------------       ------------



    Selected supplemental
     revenue information            2009        2008      Increase (decrease)

      Volume in thousands
       of EBs(1)
      Peat and Bark-based
       Growing Mixes               5,987       6,114        (127)        -2%
      Peat Moss                    3,557       4,581      (1,024)       -22%
      Bulk Bark Mixes              2,368       2,680        (312)       -12%
      Fertilizer and Minerals        291         320         (29)        -9%
      Sand-based Mixes               723         628          95         15%
                              ----------- ----------- ----------- -----------
      Total                       12,926      14,323      (1,397)       -10%
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

      Average revenue per
       EB(1) (US $)
      Peat and Bark-based
       Growing Mixes          $    20.24  $    20.09  $     0.15          1%
      Peat Moss                    10.85       10.73        0.12          1%
      Bulk Bark Mixes               8.48        8.66       (0.18)        -2%
      Fertilizer and Minerals      42.02       43.86       (1.84)        -4%
      Sand-based Mixes             10.59       11.08       (0.49)        -4%
                              ----------- ----------- ----------- -----------
      Total                   $    15.45  $    15.09  $     0.36          2%
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

      Average revenue per
       EB(1) (CDN $)
      Peat and Bark-based
       Growing Mixes          $    23.45  $    20.74  $     2.71         13%
      Peat Moss                    12.49       11.06        1.43         13%
      Bulk Bark Mixes               9.79        8.96        0.83          9%
      Fertilizer and Minerals      48.75       45.17        3.58          8%
      Sand-based Mixes             12.27       11.47        0.80          7%
                              ----------- ----------- ----------- -----------
      Total                   $    17.88  $    15.58  $     2.30         15%
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    (1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
        referring to 10 cubic feet of product. Calculation of average revenue
        per EB does not include transportation-related surcharges or the cost
        of early payment discounts.
    

Outlook

Although general economic conditions have not improved markedly, and US new home construction activity remains sluggish, Sun Gro's sales volumes for the first two months of 2010 reflect renewed optimism on the part of its grower customers. Based on current demand, Sun Gro believes that the peat supply currently on hand will be sufficient to support sales until the anticipated start of the 2010 harvest in May. It also expects to continue to benefit from generally lower transportation costs and the productivity initiatives Sun Gro implemented in 2008.

"While we are moving forward with the benefit of a significantly stronger balance sheet, the foreign exchange environment continues to reflect weakness in the US dollar. Further strengthening of the Canadian dollar could significantly erode our operating income," said Weaver. "We have expanded our hedge position going into 2010 and will continue to closely monitor our foreign exchange exposure over the course of the year."

Foreign currency contracts for 2010 total US$50.0 million at an average rate of $1.14 (US$0.88), representing substantially all of Sun Gro's anticipated purchases of Canadian dollars. For the first half of 2011, the Fund has entered into foreign currency contracts totaling US$17.0 million at an average rate of $1.06 (US$0.94).

Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the three and 12 months ended December 31, 2009 will be available at www.sedar.com and www.sungro.com on or about March 26, 2010.

Forward-Looking Information

This news release contains certain forward-looking statements within the meaning of applicable Canadian provincial securities laws. All statements, other than statements of historical fact, are forward-looking statements or information. When used in this news release, the words "anticipate", "will", "believe", "estimate", "expect", "intend", "target", "plan", "goals", "objectives", "pro forma", "forecast", "schedule", "may" and other similar words and expressions, identify forward-looking statements or information. The forward-looking statements or information relates to, among other things: compliance with Sun Gro's debt covenants; the adequacy of Sun Gro's peat supply to support sales until the 2010 harvest; and the expected benefits associated with lower transportation costs and productivity initiatives commenced in prior periods. These statements reflect the current views of the Fund with respect to future events and are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the Fund, are inherently subject to significant business, economic, political and social uncertainties and contingencies. Many factors, both known and unknown, could cause actual results, performance or achievements to be materially different from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained in this news release and the Fund has made assumptions based on or related to many of these factors. Such factors include, without limitation, risks relating to: currency fluctuations; interest rate fluctuations; Sun Gro's ability to meet its financial obligations as they fall due; financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations; Sun Gro's resource supply; competition in the growing media industry; the effect of seasonality, weather and other related factors on Sun Gro's production and sales; environmental regulations and related requirements; climate and its ability to affect the cost and quality of Sun Gro's harvest; potential product liabilities, regulatory requirements and labour relations connected with Sun Gro's operations; Sun Gro's ability to retain key personnel; potential litigation; unitholder distributions; the Fund's reliance on Sun Gro's operations; unitholder limited liability; income tax matters; the eligibility of the Fund's units under registered retirement savings plans, deferred profit sharing plans, registered retirement income funds and registered education savings plans; the nature of and statutory rights associated with units; distributions to unitholders upon redemption of units or termination of the Fund; dilution of existing unitholder interests on the issuance of additional units; restrictions on Sun Gro's potential growth under its current income trust structure, and those factors that have been identified under the caption "Risk Factors" in the Fund's Annual Information Form filed on SEDAR at www.sedar.com. Although the Fund has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated, described or intended. The Fund does not intend and does not assume any obligation, to update the forward-looking statements or information to reflect changes in assumptions or changes in circumstances where any other events affecting such statements or information, other than as required by applicable securities laws. Unitholders are cautioned against attributing undue reliance on forward-looking statements or information.

Non-GAAP Measures

EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, EBITDA of the Fund may not be comparable to EBITDA measures presented by other issuers. However, EBITDA is commonly used as an indicator of financial performance and the Fund believes that EBITDA is a useful supplemental measure that may assist in assessing the potential return on an investment in the Fund.

The calculation of EBITDA is based on net earnings (loss) for the period, adjusted for interest expense, income tax provision or recovery, depreciation, depletion and accretion, amortization of intangibles, goodwill and asset impairments, gain or loss on disposal of property, plant and equipment, unrealized gain or loss on foreign currency contracts and unrealized foreign exchange gain or loss on US dollar assets and liabilities.

Distributable cash is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, the distributable cash of the Fund may not be comparable to the distributable cash measures presented by other issuers. However, distributable cash is commonly used by Canadian open-ended trusts as an indicator of financial performance and the Fund believes that distributable cash is a useful supplemental measure that may assist in assessing the potential return on an investment in the Fund.

The calculation of distributable cash is based on cash flows from operating activities, adjusted for changes in non-cash operating working capital, sustaining capital expenditures, government grants and government loans, other loans for certain production equipment, capital lease obligations, repayments on term loans, restricted cash payments and such reserves as the Board of Directors of Sun Gro and Trustees of the Fund may consider appropriate. Certain expenditures that are incurred as part of earnings-enhancing capital projects and acquisitions are excluded from the determination of distributable cash flow if the project or acquisition is funded by term debt or equity financing.

Income Fund Profile

Sun Gro Horticulture Income Fund was launched with the completion of an Initial Public Offering on March 27, 2002. Units of the Fund are listed for trading on the Toronto Stock Exchange. At March 17, 2010, there were 22,284,681 units of the Fund issued and outstanding.

Company Profile

Sun Gro is the largest producer and distributor of peat and bark-based growing mixes to professional plant growers in the US and Canada. It is also North America's largest producer and distributor of sphagnum peat moss, with approximately 65,000 acres of peat bogs under lease. Sun Gro sells its professional products primarily to greenhouse, nursery and specialty crop growers. The company also sells peat moss and potting mixes to retail customers, either by way of private label partnerships or under its own brand names. In addition, Sun Gro sells sand-based mixes to golf course developers and landscapers. The company's North America-wide production network now comprises 12 Canadian operating plants and 13 US operating plants.

    
    Sun Gro Horticulture Income Fund
    Consolidated Balance Sheet
    (in thousands of dollars)

                                                     As at          As at
                                                  December 31    December 31
                                                      2009           2008
                                                 -------------  -------------
    Assets
    Current assets
      Cash                                       $          -   $      2,277
      Accounts receivable                              30,356         43,838
      Inventories                                      39,723         43,003
      Unrealized gain on foreign currency
       contracts                                        4,511              -
      Prepaid expenses and other assets                 2,911          4,200
                                                 -------------  -------------
                                                       77,501         93,318

    Property, plant and equipment                     110,436        123,492
    Intangible assets                                  40,490         44,853
    Unrealized gain on foreign currency contracts         115              -
    Restricted cash                                     4,790              -
    Other assets                                        1,253          1,379
                                                 -------------  -------------
                                                 $    234,585   $    263,042
                                                 -------------  -------------
                                                 -------------  -------------
    Liabilities and Unitholders' Equity

    Current liabilities
      Bank overdraft                             $      2,242   $          -
      Operating line                                   24,709         34,109
      Accounts payable and accrued liabilities         13,722         21,204
      Unrealized loss on foreign currency
       contracts                                            -          8,843
      Current taxes payable                               816              -
      Current portion of long-term debt                 7,264          6,598
                                                 -------------  -------------
                                                       48,753         70,754

    Other liabilities                                   5,887          5,518
    Unrealized loss on foreign currency contracts           -          1,042
    Long-term debt                                     57,016         76,455
    Future income taxes                                13,728         11,540
                                                 -------------  -------------
                                                      125,384        165,309
                                                 -------------  -------------
    Unitholders' equity
      Capital contributions                           211,726        211,726
      Accumulated other comprehensive loss            (19,653)       (12,200)
      Cumulative earnings                              50,146         31,225
      Cumulative distributions declared              (133,018)      (133,018)
                                                 -------------  -------------
                                                      109,201         97,733
                                                 -------------  -------------
                                                 $    234,585   $    263,042
                                                 -------------  -------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Earnings (Loss) and Comprehensive Income
    (Loss)
    (in thousands of dollars except per-unit amounts and number of units
    outstanding)

                                                   Year ended     Year ended
                                                  December 31,   December 31,
                                                      2009           2008
                                                 ----------------------------

    Revenue                                      $    229,352   $    221,935
    Cost of goods sold                                131,654        129,084
                                                 ----------------------------
    Gross profit                                       97,698         92,851

    Distribution expenses                              38,508         49,064
    Selling expenses                                   18,655         16,353
    General and administrative expenses                22,195         21,443
                                                 ----------------------------
    Total operating expenses                           79,358         86,860
                                                 ----------------------------
    Operating income                                   18,340          5,991

    Other income (expense), net                        17,434        (24,883)
    Goodwill and asset impairments                     (2,855)       (24,945)
    Interest expense                                   (9,251)        (7,440)
                                                 ----------------------------
    Earnings (loss) before income taxes                23,668        (51,277)
    Income tax (provision) recovery
      Current                                          (1,511)           111
      Future                                           (3,236)         9,105
                                                 ----------------------------
    Income tax (provision) recovery, net               (4,747)         9,216
                                                 ----------------------------
    Net earnings (loss) for the year                   18,921        (42,061)
    Other comprehensive income (loss):
      Unrealized (loss) gain on translating
       financial statements of self-sustaining
       foreign operations                              (7,453)        10,468
                                                 ----------------------------

    Comprehensive income (loss) for the year     $     11,468   $    (31,593)
                                                 ----------------------------
                                                 ----------------------------

    Basic and diluted earnings (loss) per unit   $       0.85   $      (1.89)
                                                 ----------------------------
                                                 ----------------------------

    Weighted average number of units outstanding   22,284,681     22,284,681
                                                 ----------------------------
                                                 ----------------------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Changes in Unitholders' Equity
    (in thousands of dollars)

                                    Accumu-
                                     lated
                                     Other
                          Unit-     Compre-             Cumulative
                         holders'   hensive  Cumulative   Distri-
                         Capital     Loss     Earnings    butions     Total
                       ------------------------------------------------------
    Balance -
     December 31,
     2007              $ 211,726  $ (22,668) $  73,286  $(123,825) $ 138,519

      Loss for the year        -          -    (42,061)         -    (42,061)
      Other comprehensive
       income for the
       year                    -     10,468          -          -     10,468
      Distributions for
       the year                -          -          -     (9,193)    (9,193)
                       ------------------------------------------------------
    Balance -
     December 31,
     2008              $ 211,726  $ (12,200) $  31,225  $(133,018) $  97,733
      Earnings for the
       year                    -          -     18,921          -     18,921
      Other comprehensive
       loss for the
       year                    -     (7,453)         -          -     (7,453)
                       ------------------------------------------------------
    Balance -
     December 31,
     2009              $ 211,726  $ (19,653) $  50,146  $(133,018) $ 109,201
                       ------------------------------------------------------
                       ------------------------------------------------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Cash Flows
    (in thousands of dollars)

                                                   Year ended     Year ended
                                                  December 31,   December 31,
                                                      2009           2008
                                                 ----------------------------
    Cash flows from operating activities
    Net earnings (loss) for the year             $     18,921   $    (42,061)
      Items not affecting cash
        Depreciation, depletion and accretion          10,965         10,904
        Amortization of intangible assets               2,422          2,450
        Asset impairment                                2,855          1,572
        Goodwill impairment                                 -         23,373
        Unrealized (gain) loss on foreign
         currency contracts                           (14,511)        13,999
        Unrealized foreign exchange (gain) loss
         on US dollar assets and liabilities           (7,090)        10,429
        Loss (gain) on disposal of property,
         plant and equipment                           (1,135)           212
        Future income tax provision (recovery)          3,236         (9,105)
                                                 ----------------------------
                                                       15,663         11,773

      Change in non-cash operating working
       capital                                          4,497         (1,056)
                                                 ----------------------------
                                                       20,160         10,717
    Cash flows from investing activities

      Instalment note payment for business
       acquisition                                       (496)          (392)
      Additions to property, plant and equipment       (2,985)        (2,901)
      Proceeds from disposal of property, plant
       and equipment                                    1,461             75
                                                 ----------------------------
                                                       (2,020)        (3,218)
    Cash flows from financing activities
      Distributions paid to unitholders                     -        (10,864)
      Proceeds from term loans                              -         50,425
      Restricted cash payments                         (4,978)             -
      Repayment of term loans                          (7,428)       (39,790)
      Decrease in operating line                       (9,400)        (2,505)
      Payments on capital leases and other
       term loans                                        (486)          (493)
                                                 ----------------------------
                                                      (22,292)        (3,227)

    Effect of exchange rate changes on cash              (367)           (29)
                                                 ----------------------------

    Decrease (increase) in bank overdraft              (4,519)         4,243
    Cash (bank overdraft) - beginning of the year       2,277         (1,966)
                                                 ----------------------------
    Cash (bank overdraft) - end of the year      $     (2,242)  $      2,277
                                                 ----------------------------
                                                 ----------------------------
    Supplemental cash flow information
      Interest paid                              $      9,256   $      7,194
      Income taxes paid (refund), net            $        (80)  $        445
      Equipment acquired under capital lease     $          -   $        161
    

%SEDAR: 00017490E

SOURCE SUN GRO HORTICULTURE INCOME FUND

For further information: For further information: Bradley A. Wiens, Vice-President, Finance and CFO, Sun Gro Horticulture Income Fund, Tel: (425) 373-3603, Email: bradw@sungro.com, Website: www.sungro.com

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SUN GRO HORTICULTURE INCOME FUND

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